Edelweiss Custodial Services Ltd (ECSL) allegedly sold Rs420 crore of clients’ shares, mutual funds and securities from 9th March to 7 May 2020, without first seeking additional cash collateral or encashing the bank guarantee (BG) available with it, alleges Paresh Mulji Kariya, promoter of the failed Anugrah Share & Brokers Pvt Ltd (Anugrah) in a court affidavit. He states on oath that ECSL did not exercise ‘reasonable care and diligence’ and, “as a consequence, in some instances, it is very probable that securities may have been improperly sold by ECSL.”
This is a serious charge which formalises the allegations that were made about the clearing member and could open a can of worms. Anugrah, with its associates, was managing over Rs1,000 crore of investors’ money and has run up huge losses in derivatives trading. It has been running an unauthorised derivatives advisory service (DAS) with Teji Mandi Analytics Pvt Ltd, (TMA) and Om Shri Sai Investments (OSSI). Nearly 37-odd investors have sued Anugrah in the Bombay High Court, and more are likely to join in.
Mr Kariya’s affidavit in connection with these arbitration petitions (No.30 of 2020 and others) argues that the general practice in the derivatives segment is that when a trading member has a debit balance, he is first asked to bring in additional collateral. If that is not provided, the clearing member/ custodian encashes the BG that is available. It is only if the BG falls short, that clients’ shares pledged with the clearing member are sold to meet the settlement requirements. He accuses ECSL of having sold client shares on 26 different dates since March 2020.
Moneylife has earlier reported how TMA had made similar allegations against ECSL in an email to its investors. TMA was running an unauthorised DAS scheme offering extremely high monthly returns and had garnered over Rs800 crore; however, its entire business was routed through Anugrah. The nature and legality of that arrangement, and why it was not flagged by annual inspections of the National Stock Exchange (NSE), is unclear.
On 31st August, we had reported how ECSL and Anugrah terminated their relationship and the brokerage firm moved to ICICI Bank as clearing broker on 20th July, just days before the NSE, after a surprise inspection, switched off its derivatives trading facility bringing its problems to a head and exposing the ponzi scheme that it seems to have been running.
Interestingly, Mr Kariya has tried to wash his hands off any responsibility for ‘clients’ of TMA which was running the illegal DAS. He says that trades of all TMA clients in all market segments including cash, derivatives, commodities and currency were independently executed and Anugrah merely offered a platform and passed on the brokerage to the firm. He claims that invoking arbitration provisions by TMA clients is misconceived because arbitration is only possible between Anugrah and TMA and not the latter’s clients. He goes on to offer a detailed explanation of how TMA conducted its own trades through Anugrah. This is important because the largest chunk of money owed to investors (over Rs800 crore) came through TMA.
Remember, NSE switched off Anugrah’s derivatives business on discovering Anugrah’s unauthorised DAS through OSSI which had collected Rs165 crore and shutdown in 2019. Why did it fail to spot TMA’s significantly larger DAS of over Rs800 crore? So far, there is no action whatsoever against TMA, although investors have rushed to the economic offences wing (EOW) of the Mumbai police as well as the Bombay High Court against Anugrah.
In an interim order on 31 August 2020, Justice Gautam Patel of the Bombay High Court asked Anugrah not to alienate assets to the tune of Rs52 crore covering the claims of a set of petitioners. We understand that many more investors have filed similar petitions since then which would probably be taken up at the next hearing on 18th September.
Meanwhile, Mr Kariya has submitted a list of his assets including offices, cars, computers, air-conditioners and a small list of shares, etc, which are largely unencumbered. He also mentions a large number of bank accounts with various public and private sector banks for the multiple trading memberships of the group across market segments (equities, commodities, currency, etc) and admits that he has multiple BGs against deposits maintained in these accounts. These add up to a fraction of the money owed to investors.
Moreover, not all the assets seem to be a part of this affidavit. Moneylife recently reportedhow a search of the statutory filing website MCA21 of the ministry of corporate affairs (MCA) reveals that Mr Kariya and his wife had significant interest in real estate. Many of these are not included in the affidavit.
What is the way forward for those who have lost money to Anugrah and other dubious brokers who promised high returns of derivatives arbitrage and went bust? Those with smaller investments could benefit from the stock exchange’s investor protection fund, when a broker is finally declared a defaulter. But, remember, it took nearly nine months for NSE to expel Modex International Securities who lured investors with a similar scheme. It was declared a defaulter on 16th September and investors will now have to file claims with NSE’s investor protection fund (IPF). This has a cap of Rs25 lakh and that too is available only in respect of trades on the Exchange and loss of securities placed as margin. These investors will be lucky to see any money before the end of 2020.
Since Anugrah went belly up in August, there will be a similarly long-drawn process of audit, inspection, hearings, etc, before it leads to concrete action. That may be too late to recover anything meaningful. For investors who have lost large sums in failed brokers such as Anugrah (including TMA), BMA Wealth Management, Modex and Allied, it may be futile to wait for NSE and the Securities and Exchange Board of India (SEBI) to complete their long-winded investigations.
Already, a SEBI circular of 1 July 2020 compromises their interest by closing arbitration as an option. Advocate Ravi Hegde of Parinam Law Associates, a securities law firm, says that SEBI’s or NSE’s circulars also cannot be challenged before the Securities Appellate Tribunal following the Supreme Court order in NSDL vs SEBI (civil appeal 186 of 2007).
This leaves only the writ jurisdiction of the high courts to raise some important issues that are unlikely to be heard otherwise. For instance, did the Exchange and the regulator do enough to stamp out dubious derivatives schemes? Why didn't the large trading volumes of brokers, like Anugrah and Modex, lead to additional checks and inspections as is warranted by specific circulars of the Exchange?
For instance, NSE’s 3 July 2017 circular on enhanced supervision makes it mandatory for brokers to upload the fund balance and securities balance of the clients. Did Anugrah upload accurate information? Who is responsible for verifying these facts, especially since investors now say that the broker maintained two sets of books and false information may have been provided?
Were the funds lying with brokers adequately monitored as per NSE’s 20 July 2017 circular? In Anugrah’s case, did the clearing member, ECSL, alert NSE to the repeated payment problems of Anugrah since January 2020? What action was taken by the Exchange? Why did inspections fail to spot the illegal DAS through TMA? Many of these issues are not addressed by SEBI’s new regulations that kicked in on 1 September 2020 which make it harder for brokers to misuse client securities and funds. But will shady brokers discover loopholes and work their way around those too?
None of these questions is going to be answered unless SEBI, NSE, NSE’s clearing corporation and the clearing member are required to provide answers in a judicial hearing. The unfortunate truth is that while we have a powerful market regulator since 1992, SEBI has long ago stopped listening to ordinary retail investors or being accountable to them.